Singapore’s Fair proposals to hit insurers hardest

Singapore’s planned overhaul of its rules on providing financial advice will have the biggest impact on life insurance companies, argue market participants.

Under the Financial Advisory Industry Review (Fair), the Monetary Authority of Singapore (MAS) is reviewing whether to limit or ban commissions and trailer fees.

It will impact all firms in Singapore – from distributors to product manufacturers – directly or indirectly and has sparked fierce debate. Fair was announced on March 26, and by July 6 the consultation had attracted 1,300 responses.

There are five ‘key thrusts’ of the review: to raise the competence of financial advisory representatives; raise the quality of financial advisory firms; make financial advice a dedicated service; reduce the distribution costs of insurance products; and promote a culture of fair dealing.

Market participants agree that the fourth of these aims – cutting distribution costs – will have the biggest effect on the industry.

“The big life insurers have the most to lose from the proposals,” says one senior Singapore-based bancassurance executive. It’s no coincidence that MAS announced its plans in a speech to the Life Insurance Association (LIA) earlier this year, he adds.

For one thing, insurance groups incorporate both product manufacturing (of investment-linked products) and distribution, with both businesses potentially being affected. They have invested millions of dollars in large tied agency forces, and mooted changes would squeeze them hard.

There are around 13,000 tied agents in the city-state and 3,000 independent financial advisers (IFAs) – out of a total of some 30,000 sales staff that will fall under the new requirements. The biggest life firms in Singapore (AIA, Great Eastern and Prudential) are each thought to have more than 3,000 agency salespeople in the Lion City, while Manulife has around 1,000. That is a lot of people to provide with more training if needed.

Moreover, sources say there are a large number of part-time agents operating for insurers in the city-state. In his speech in March, the MAS’s managing director, Ravi Menon, said it was a conflict of interest for such advisers to engage in certain other activities, such as selling property or money lending, and that the regulator would prefer to see full-time dedicated financial advisers.

Another likely reason for the greater focus on insurers is that the products they manufacture tend to be less transparent than, say, unit trusts or mutual funds, in terms of both fees and structure. For instance, back-end investment-linked insurance products (or ‘101 products’) are not well understood by the general public, says Lim Wee-Kiong, Singapore general manager at IFA platform iFast.

Smaller financial advisory firms are also set to be significantly affected by the proposals, in that some won’t be able to meet the requirements around capital levels and/or compliance and controls. This is likely to lead to consolidation.

Such M&A has already begun, with UK insurer Aviva agreeing in August to buy a majority stake in Singapore-based Professional Investment Advisory Services. And more deals are being discussed, notes the bancassurance executive, but probably little will happen until the rules come out. He declined to name any firms involved.

The initial timeframe for the Fair review to publish its first conclusions was by the end of this year, but most feel that will now happen next year, potentially in the first quarter. The next step would likely be another round of consultation followed by a final draft perhaps in the second half of 2013.

* A feature on the Fair review appears in the latest (October) issue of AsianInvestor magazine.